Trade Is Not A Big Driver Of The American Economy

Expect the controversy over just how much trade contributes to America's economic growth to be ramped up as growth slows. Trade between countries is given far to much credit for being a big driver of our economy. It pales next to factors such as government spending and credit expansion. The fact is if John needs to buy a wheelbarrow for work it does not matter where it is built. John needs and will buy a wheelbarrow. Where trade does fit into this has to do with what country employes workers to make that wheelbarrow and how much it will cost. While John may save money if the wheelbarrow was produced in a low wage country trade has more to do with who benefits from commerce and should not be seen as a force driving us forward.

Trade Is Not A Big Driver (click to enlarge)

In many ways, trade should be seen as a way to increase access to a greater variety of goods at a better price but this only works over a long period of time if it is balanced. A county that constantly enjoys a trade surplus at the expense of their trade partners often reaches a position to exploit the weaker countries and generally does so. Throughout history, trade policies have had massive long-term ramifications on the strength of a nation's economy. The promise that increased trade will create new jobs has turned out to be largely a myth. Still, we hear the narrative spun by politicians playing the "fear card" with statements such as "We can’t let countries like China write the rules of the global economy.” This implies we will lose the power to control our own fate if we stand firm and protect what is ours.

While the President and the markets want the Fed to do more we should understand simply printing more money and lowering rates has lost its ability to create growth. In many ways, the Federal Reserve has become the great enabler responsible for allowing the world to embark on a huge and rapid expansion of debt and credit during the last decade. This global credit binge could not and would not have occurred without the Fed being totally complicit and agreeing to allow it to take place. As the world's most powerful reserve currency a strong dollar could have contained the economic overindulgence we have witnessed.

By their actions, the Fed has failed to force other currencies to toe the line or pay a stiff price. It has been the Fed that decided to allow the dollar to be used as a global prop. A major problem stemming from low interest easy money policies is that the quality of the growth it generates is often very poor and creates problems in the future. An example of this is the rise in sub-prime loans that fuel auto sales. Just how bad the situation has become tend to be papered over until the point where it can no longer be ignored and things collapse.

The demand that trade partners be fair has become the scapegoat for a sagging global economy at the end of a growth cycle. The real reasons for slowing growth flow from poor government policies and the recognition that quality growth trumps quantity. Trade is overrated as an economic driver which means when imports are reduced internal production simply takes up the slack. For a country like America which has a huge trade deficit, this is a good thing. Long-term planning and sustainable growth is key to a healthy economy. Instead of getting to the business of setting things to right, corrupt and lazy politicians and bankers across the globe play the blame game.

An article recently by Mohamed Aly El-Erian published on Project Syndicate states; "Trade tensions are a symptom rather than a cause of the world’s underlying economic and financial malaise. Moreover, an excessive focus on trade could deflect policymakers’ attention from other measures needed to ensure faster and more inclusive growth in a genuinely stable financial environment." He then goes on to write, "Monetary policy has not been very effective in boosting sustainable growth, but it has lifted asset prices significantly. This has further fueled complaints that the system favors the already-rich and privileged rather than serving the broader population"

History has shown that trade agreements with low wage nations are not the great job creators we have been told. Much of the "free trade" movement is driven by mega-companies desire for larger markets and greed. It is difficult to deny that in our modern world many large companies already have more power than most nations and their power continues to grow at an alarming rate. The desire of companies to both develop and control future rules has caused them to lobby individual governments into giving up control and becoming subservient to corporate “efficiency.”

It is these mega-companies and the money they wield that has hijacked the conversation about how much benefit creates. I contend that trade shifts growth and jobs from one country to another rather than simply adding to the equation in a substantial way. This translates into the companies and their owners or shareholders benefiting far more than the economy in general. In many ways, the global economy has become an ill-regulated business model tilted to favor big business and giant conglomerates. It is not difficult to make the argument this has been harmful to the smaller domestic companies that generate many jobs here in America, Apple is a prime example of this.

Circling back to the example of John and his wheelbarrow used at the beginning of this article, it is wise to remember that the economic cycle is rooted in reality. The Johns and Freds of the world only need so many wheelbarrows, when they have enough, they stop buying them until they are worn out and they need more. Low interest rates, super sales, and easy credit can only stimulate growth in these sales so much and often it is at the cost of future sales. As the economy slows and trade tensions rise expect more fingers to point at sagging trade as the culprit. The fact is, no matter what we have been told by those with an agenda, trade between countries is only a small factor in what produces quality and sustainable economic growth.